What are stock CFDs?
Stock CFDs are an excellent way for small businesses to break into the stock market. They allow traders to buy and sell stocks on margin, meaning that they can make investments with only one or two thousand pounds at their disposal. However, this also means that you could lose out heavily if you are not careful with your finances.
Stock CFDs are ‘contracts for difference’. It means that when a trader makes a deal, they agree with another trader on the other side of the same dealing. The buyer of the contract agrees to pay the seller whatever a change in price causes profit or loss until the day of expiry comes.
At this point, the contract will have made more money than the purchase cost, or it has lost some. The seller of the contract agrees to pay the buyer whatever profit or loss they have made in this way.
The contract seller can take part in this trading without placing a massive investment at risk – they do not have to have thousands or even hundreds of thousands on deposit with the broker. It means that it leaves them free to set up an account with multiple different brokers and trade on margin with each one, spreading their risk across several brokers instead of keeping all their eggs in one basket.
Binary Options Trading
As the name suggests, Binary Options Trading is a form of trading where traders buy and sell assets, such as commodities, currencies, and stocks, pegged to an underlying value. Binary options are often seen as ‘all or nothing’ propositions – investors make or lose their money depending on whether the asset’s price ends up at one of two levels by given maturity date.
One significant advantage that binary options have over traditional trade methods is that they allow for instant margin trading – very much like buying and selling stocks or Forex pairs in real-time online.
What distinguishes CFDs from other forms of trading?
CFDs (Contracts for Difference) were initially designed to allow companies and individuals to take indirect ownership positions in shares, indices and commodities by using the margin on traded stocks. A contract is opened for a specific stock (or another tradable asset) with two possible outcomes, one positive and one negative.
The trader buys or ‘goes long’ when he believes that the asset’s price will rise over time; conversely, an investor goes ‘short’ when he expects prices to drop. Margin trading allows traders to place larger bets than would be possible if they had to pay the total value of the deal upfront, so daily profits can often exceed intra-day gains on shares or indices.
The difference between what you buy an instrument for and what you sell it for is your ‘mark-to-market’. The profits or losses are added to the margin account when trades are closed out.
Advantages of trading CFDs with an EA
Short-term trades can be opened for minutes, days or weeks by choosing the expiry time that is right for you; long-term positions can last months, even years, if set up correctly. Once open, CFD trades stay open, so they don’t have to be constantly monitored like short-term binaries.
Providers like AVA Trade make available stable platforms with user-friendly interfaces. Some brokers offer free educational resources such as instructional webinars and ebooks to give traders a thorough understanding of the market landscape.
Margin requirements vary from broker to broker but generally range from 1-20%; certain stock CFDs have much higher margins, with low-priced shares often requiring upwards of 50% in margin.
CFD trading isn’t suitable for all traders – especially those without significant investment experience or high-risk tolerance. It is essential to understand the concept of ‘stop loss’ orders before opening an account with an online broker. These are used to close positions and limit potential losses when market fluctuations exceed a pre-determined threshold. Binary options may not include this level of protection.